Aon Retirement and Investment Blog

Weekly Update - 09 July 2018

July 09, 2018

NEW INTELLECTUAL CAPITAL

Banking on Pensions – This paper describes some of the unique trends in how the banking industry manages its pension plans. Specifically, the contribution and investment strategies used by plan sponsors in the banking industry tend to be different from what other industries do.

Global equity markets ended the week higher supported by encouraging US economic data. In what was a holiday-shortened week due to the US Independence Day holiday, investor concerns over a potential US-China trade war were enhanced with both countries imposing tariffs worth US$34bn on each other. The S&P 500 Index rose by 1.6% over the week, outperforming the MSCI World Index which rose by 1.2%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (4.3% vs. 2.0%).

US Small Cap stocks outperformed Large Cap stocks over the week as the Russell 2000 Index rose by 3.1% while the S&P 500 Index rose by 1.6%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (11.0% vs. 4.3%). Growth stocks outperformed Value stocks over the week as growth stocks rose by 1.8% while value stocks rose by 1.4%, as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (9.85% vs. -0.89%).

Bonds

The 10-year US treasury yield fell by 3bps to 2.82% whilst the 30-year US treasury yield fell by 5bps to 2.93%. The spread between the 10-year and 2-year US treasury yield reached the lowest level since 2007.

The 20-year TIPS yield fell by 4bps to 0.77% whilst the 20-year breakeven remained unchanged at 2.10%.

The spread on the Bloomberg Barclays Capital Long Credit Index over the yield on US treasuries fell by 2bps at 172bps and the Bank of America Merrill Lynch US Corporate Index credit spread inched 1bp lower to 128bps. The US high yield bond spread over US treasury yields widened by 13bps to 374bps over the week. The spread of USD denominated EM debt over US treasury yields narrowed by 16bps to 351bps.

Commodities

The S&P GSCI moved 1.3% lower in USD terms over the week. The energy sector fell by 1.5% as the price of WTI crude oil fell by 0.5% to US$74/BBL. Industrial metals fell by 4.3% following the decline in copper prices which dropped by 4.8% to US$6,326/MT. Agricultural commodities went up by 0.7% while the price gold went up by 0.4% to US$1,255/ounce.

Currencies

The US dollar weakened against all major currencies over the week. The US dollar depreciated by 0.5% against sterling, ending the week at $1.33/£. The US dollar depreciated by 0.7% against the euro, finishing the week at $1.18/€. The US dollar depreciated by 0.3% against the Japanese yen, ending the week at ¥110.45/$. The US dollar fell by 0.4% against the Canadian dollar over the week to close at C$1.31/$.

Economic Releases

Economic data in the US was more positive last week following the previous week's disappointing releases. The Institute of Supply Management's (ISM) manufacturing index jumped for a second consecutive month, unexpectedly rising by 1.5 points to 60.2. Analysts had expected the index to move 0.2 points lower. US factory orders also exceeded expectations of being unchanged and rebounded over May, offsetting the upwardly revised 0.4% decline in April. The US Jobs Report showed that 213k jobs were added to the US economy, surpassing estimates of a 195k increase. Moreover, the previous month's increase was revised higher to 244k from 223k. Despite the increase, the US unemployment rate unexpectedly inched higher to 4.0% from 3.8% but this was due to the unanticipated increase in the labour force participation rate (moving from 62.7% to 62.9%). US wage growth, however, failed to meet consensus estimates of 2.8% (year-on-year) and remained at 2.7%.

In the Eurozone, following the downward revision in April's reading to 8.4%, the unemployment rate was unchanged in May. This represented the lowest level since December 2008 and was below expectations of 8.5%. The retail sector continues to slow, as retail sales growth decelerated by 0.2% to 1.4% in May on a year-on-year basis. In Germany, industrial production sharply increased by 2.6% in May, rebounding from a 1.6% decline in April. The increase was driven by strong output growth for consumer (6.5%) and intermediate (3.0%) goods and was above market expectations of a 1.1% increase. The final readings of the Markit Eurozone and Germany PMIs were revised up to 54.9 and 54.8 respectively.

Japanese economic data was fairly mixed. The Bank of Japan’s Q2 2018 Tankan survey revealed a pessimistic outlook for the Japanese manufacturing sector. The closely-watched Tankan large manufacturer’s index fell to 21 from the previous reading of 24. However, the large non-manufacturing index rose to 24 from 23. The Nikkei services PMI rose to 51.4 in June from 51.0. There was positive news in labour markets as labour cash earnings accelerated, rising by 2.1% for the year to May from a downwardly revised 0.6% increase, and above a forecasted increase of 0.9%. Real wages rebounded by 1.3% over the same period after decreasing by a revised 0.2% previously.

The Caixin manufacturing PMI, which focuses more on small and mid-sized Chinese businesses, decreased to 51.0 in June from the previous reading and expectations of 51.1. However, growth in the services sector accelerated with the services PMI rising to 53.9 from 52.9; above expectations of 52.7.

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